Waterloo Inc. is a company in the transportation and logistics sector. Last year
ID: 1171848 • Letter: W
Question
Waterloo Inc. is a company in the transportation and logistics sector. Last year it earned net income of $26 million. Its balance sheet is (S millions) Assets Liabilities $20 Cash Longterm assets $190 S10 Account payable Equity Preferred Stock (50,000 shares) $50 Common Stock (1 million shares) S1 Additional Paid in Capital Retained earnings $99 Total Assets $200 Total Liabilities & Equity $200 There is no longterm debt on the balance sheet. It has outstanding shares of1 million shares of Common Stock outstanding The certificate of incorporation provides that Preferred Stock has the following feature: Article III, Adjustment to the Conversion Price: Upon notice of conversion, the Preferred Stockholder may convert each $1,000 share of Preferred Stock into 10 shares of Common Stock. In the event of a stock split, stock dividend or the issuance of diluted shares of Common Stock in connection with the grant of stock pursuant to an executive compensation plan, the conversion ratio shall be adjusted to reflect the dilution in the stock price resulting from these actions. The company's charter also provided that dividends may be paid from net income or retained earnings, and this is permissible under corporate law The company's common stock price is $130 per share, and the market capitalization of common stock is $130 million. Given the company's $26 million in net income, it trades at a P/E multiple of 5x. Most other firms in the transportation and logistics sector typically trade at 8x-10x earnings. The board and management believe that the market price is not properly valuing the company. As a result, they are concerned about a hostile takeover bid since transportation companies are the types of companies that are subject to LBOs As a way to deter a potential bid, the company issued $100 million of unsecured Debentures at a rate of 8% (longterm debt) to Alliance Capital. The intent was toExplanation / Answer
Step 1 of 3
What is a Debenture?
Companies generally raise funds by issuing as share capital or through borrowing from lenders. A debenture is one of ways of company borrowing where the company agrees to repay the debt where may also be a charge over the company’s assets to ensure the repayment of this debt.
Debenture is an alternative form of investment in a company that is more secured than investment in shares because company must pay interest and it will be paid before the dividend payment. Debenture holders also get privilege, if the company which issued the debentures becomes bankrupt. A disadvantage is that debenture holders have no share in the company and therefore have no control over it.
Step 2 of 3
Potential legal liabilities of Waterloo Inc. with respect to debenture:
Step 3 of 3
Potential legal liabilities with respect to common shareholders:
Common shareholder of a company enjoys a number of rights and powers in a company in exchange for its investment in the company. As a company is a separate legal entity, the company, not the shareholder, owns the assets of the company. As the shareholder is a part owner, the shareholder can have a say in the running of the company by, for example, voting on key issues.
In the event of liquidation the common shareholder has right over the assets of the company but only after the Bond holders and preferred shareholders have been paid.
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